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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 0-20580
LIFE MEDICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
incorporation or organization) Identification No.)
379 Thornall Street, Edison, New Jersey 08837
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(732) 494-0444
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE - 7,922,559 SHARES OUTSTANDING AT
NOVEMBER 11, 1998
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LIFE MEDICAL SCIENCES, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Statements of Operations (unaudited) for the 3
nine month and three month periods ended September 30, 1997
and 1998.
Condensed Balance Sheets as of December 31, 1997 4
and September 30, 1998 (unaudited)
Condensed Statements of Cash Flows (unaudited) for the 5
nine month periods ended September 30, 1997 and 1998
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
PART II - OTHER INFORMATION
Item 5 Other Information 10
Item 6. Exhibits and Reports on Form 8-K
Signatures 11
Exhibit Index 12
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue
Product sales $ $ 601 $ $ 1,116
Royalties 17 4 50 21
--------- --------- --------- ---------
Revenue 17 605 50 1,137
Cost of goods sold 257 484
--------- --------- --------- ---------
Gross profit 17 348 50 653
Operating expenses:
Research and development 1,665 980 4,294 3,248
Sales and marketing 1,129 2,683
General and administrative 28 573 1,427 1,480
--------- --------- --------- ---------
Operating expenses 1,693 2,682 5,721 7,411
--------- --------- --------- ---------
(Loss) from operations (1,676) (2,334) (5,671) (6,758)
Interest income 132 48 455 163
Interest expense (1) (1) (3) (3)
--------- --------- --------- ---------
Net (loss) $ (1,545) $ (2,287) $ (5,219) $ (6,598)
========= ========= ========= =========
Net (loss) per share - basic and diluted $ (0.20) $ (0.29) $ (0.66) $ (0.83)
========= ========= ========= =========
Weighted average shares outstanding 7,923 7,923 7,918 7,923
</TABLE>
3
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LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except per share data)
(unaudited)
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,733 $ 564
Short-term investments 4,306
Inventory 352
Accounts receivable 286
Prepaid expenses and advances 90 347
--------- ---------
Total current assets $ 7,129 $ 1,549
Long-term investments 530
Furniture and equipment-at cost (less depreciation of $58 and $82) 114 141
Other assets 13 45
--------- ---------
TOTAL $ 7,786 $ 1,735
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligation $ 8 $ 8
Accounts payable 294 564
Accrued expenses 852 1,089
Other liabilities 66
--------- ---------
Total current liabilities 1,154 1,727
Capital lease obligation 26 22
Deferred royalty income 441 419
--------- ---------
Total liabilities 1,621 2,168
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized - 5,000;
none issued
Common stock, $.001 par value; shares authorized - 23,750;
issued and outstanding - 7,923 and 7,923 8 8
Additional paid-in capital 33,988 33,988
Accumulated deficit (27,831) (34,429)
--------- ---------
Total stockholders' equity 6,165 (433)
--------- ---------
TOTAL $ 7,786 $ 1,735
========= =========
</TABLE>
4
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<TABLE>
<CAPTION>
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands, except per share data)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES: --------------- ---------------
<S> <C> <C>
Net (loss) $ (5,219) $ (6,598)
Adjustments to reconcile net (loss) to net cash (used in) operating activities:
Depreciation 36 24
Deferred royalty income (50) (22)
Fair value of options issued as compensation 230
Changes in operating assets and liabilities:
(Increase) in inventory (352)
(Increase) in accounts receivable (286)
(Increase) in prepaid expenses and advances 183 (257)
(Increase)/Decrease in other assets 16 (32)
Increase in accounts payable 4 270
Increase/(Decrease) in accrued expenses and other liabilities 196 303
--------------- ---------------
Net cash (used in) operating activities (6,950)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (661) (51)
Purchase of investment securities (5,923)
Proceeds from maturity of investment securities 3,042 4,836
--------------- ---------------
Net cash (used in) provided by investing activities (3,542) 4,785
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capitalized lease (5) (4)
Cost of registration of common stock previously issued (49)
--------------- ---------------
Net cash (used in) financing activities (54) (4)
--------------- ---------------
Net (decrease) in cash and cash equivalents (8,200) (2,169)
Cash and cash equivalents at beginning of period 11,236 2,733
--------------- ---------------
Cash and cash equivalents at end of period $ 3,036 $ 564
=============== ===============
</TABLE>
5
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LIFE MEDICAL SCIENCES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
A) BASIS OF PRESENTATION
The accompanying condensed financial statements do not include all of
the information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but in the opinion of management, contain all adjustments
(which consist of only normal recurring adjustments) necessary for a fair
presentation of such financial information. Results of operations for
interim periods are not necessarily indicative of those to be achieved for
full fiscal years. These condensed financial statements should be read in
conjunction with the Company's audited financial statements for the year
ended December 31, 1997 included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
B) NET (LOSS) PER SHARE
The net loss per share is computed using the weighted average number
of common shares outstanding during each period. Outstanding options and
warrants have not been considered since their effect would be antidilutive.
C) PREPAID EXPENSES AND ADVANCES
The September 30, 1998 balance includes $285,000 associated with
Clinicel advertising scheduled for the fourth quarter 1998.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Life Medical Sciences, Inc. (the "Company"), is a biomaterials company
engaged in the development and commercialization of innovative and cost-
effective medical devices for therapeutic applications. The Company's
strategy is to apply its proprietary polymer technology to the development
of multiple products that address unmet therapeutic needs or offer
improved, cost-effective alternatives to current methods of treatment.
Products currently under development focus on preventing or reducing post-
operative surgical adhesions. The Company has also developed and begun
commercialization of a line of novel silicone gel-filled cushions intended
for the treatment of hypertrophic and keloid scars.
Since its inception, the Company has been engaged primarily in
research and development of its technologies and proposed products,
commercialization of the Sure-Closure System and Clinicel line of products
and organizational activities. In July 1994, the Company sold the Sure-
Closure System and focused its resources primarily on development of its
in-situ tissue culturing technology and bioresorbable polymer technology as
well as proposed products to be derived from such technologies. During the
second half of 1997, the Company concluded that its in-situ tissue
culturing technology products in clinical trials would not yield the
desired benefits and therefore revised its strategy to concentrate its
resources on the proposed products based on its bioresorbable polymer
technology. All revenue to date has been derived from sales of the Sure-
Closure System or the royalties thereon and beginning in April, 1998 from
the sales of Clinicel.
Certain statements in this Report on Form 10-Q (the "Report") under
this Item and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements regarding future cash requirements. Such
forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially
different from any future results, performance, or achievements expressed
or implied by such forward-looking statements. Such factors include, among
others, the following: delays in product development; problems or delays
with clinical trials; failure to receive or delays in receiving regulatory
approval; lack of enforceability of patents and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; competition; material costs and
availability; the loss of any significant customers; changes in business
strategy or development plans; quality of management; availability, terms
and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply
with, government regulations; and other factors referenced in this Report.
When used in the Report, statements that are not statements of material
facts may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "anticipates", "plans", "intends", "expects",
"believes" and similar expressions are intended to identify such forward-
looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the results of any revisions
to these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
7
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RESULTS OF OPERATIONS
In April 1998, the Company launched a direct-to-consumer advertising campaign in
conjunction with the introduction of its CLINICEL silicone gel-filled cushions
and ancillary products for treatment of hypertrophic and keloid scars. During
the third quarter, this campaign has been expanded through distribution of the
CLINICEL products through drug wholesalers and certain retail drug stores in the
United States. Revenue for the three month and nine month periods ended
September 30, 1998 was $605,000 and $1,137,000 respectively. Sales of CLINICEL
products accounted for $601,000 and $1,116,000 respectively of total revenue
with royalty income from sales of the Sure Closure System amounting to $4,000
and $21,000 respectively. For the prior year, total revenue of $17,000 and
$50,000 for the three month and nine month periods ended September 30,1997 were
totally associated with royalty income from product sales of the Sure Closure
System.
Research and Development expenses totaled $980,000 and $3,248,000 for the three
month and nine month periods ended September 30,1998 respectively. Total
expenses for Research and Development for the comparable periods during the
prior year were $1,665,000 and $4,294,000 respectively. The reduction in
expenditures compared to the prior year was largely attributed to the reduced
level of clinical trial activity during the current year. In 1997, the Company
was engaged in two European clinical trials involving two products based on its
in situ tissue culture technology as well as a clinical trial on its REPEL
bioresorbable adhesion barrier film in gynecological surgery. During 1998,
expenses have been largely associated with the development and pre-clinical
assessment of the Company's expanded range of post-operative adhesion prevention
products based on its proprietary bioresorbable polymer technology.
Sales and Marketing expenses were $1,129,000 and $2,683,000 for the three and
nine month periods ended September 30, 1998 respectively; there were no
comparable expenses for the prior year. The current year expenditures were
exclusively associated with the product launch and promotion of the CLINICEL
product line. The major elements of this expense category were journal
advertising to both consumer and professional audiences and contract
telemarketing costs.
General and Administrative expenses were $573,000 and $1,480,000 for the three
and nine month periods ended September 30,1998 respectively; whereas, spending
for the comparable periods in the prior year totaled $28,000 and $1,427,000
respectively. The year-to-year comparison for the three month period is
distorted by the reversal, during 1997, of a non-cash expense for stock-based
compensation of approximately $286,000, which was recorded earlier in 1997. In
addition, expenses during the current three month period were increased by legal
and other professional fees associated with a security registration for class A
and B warrants as described in Item 5.
Interest income was $48,000 and $163,000 for the three month and nine month
periods ended September 30,1998, respectively compared to $132,000 and $455,000
for the same prior year periods, respectively. The reduction in interest income
levels during the current year periods is directly attributable to the lower
balances of cash and cash equivalent shown on the balance sheet.
Interest expense for the three and six month periods ending September 30,1998 of
$1,000 and $3,000 respectively represent interest on capital leases entered into
for certain office equipment.
The Company recorded a net loss for the three month and nine month periods ended
September 30,1998 of $2,287,000 and $6,598,000 respectively compared to
$1,545,000 and $5,219,000 for the same periods in the prior year. The increased
levels of losses are primarily attributed to the sales and marketing expenses
associated with the launch of the CLINICEL product line partially offset by
gross profit on CLINICEL and reduced research and development expenses as
previously explained. The Company expects to incur additional losses in future
periods.
Liquidity and Capital Resources
The Company had cash and cash equivalents available of $564,000 as of September
30,1998 as compared to cash and investments $7,569,000 as of December 31,1997.
The decrease in cash and investments during the nine month period ended
September 30,1998 resulted from expenditures made to support the launch and
promotion of the CLINICEL product line partially offset by the proceeds from
sales of these products during the period. Resources were also consumed for
research and development programs and administrative expenses.
8
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At September 30, 1998, the Company had a working capital deficit of $178,000.
The current cash and cash equivalents balance as of September 30,1998 may not be
sufficient to meet its cash requirements through the remainder of 1998. The
Company is currently in discussion with venture and private investors regarding
a private placement of new equity in amounts sufficient to support near term
operations. Any equity financing may be dilutive to current stockholders. The
Company is also pursuing other initiatives, including trade receivable financing
and licensing/marketing agreements intended to improve its financial condition.
There can be no assurance that the Company will be able to secure the necessary
financing when required or that such financing will be available on terms
acceptable to the Company. The Company has reduced spending on certain programs
as a means of preserving its cash resources and is currently in discussions with
third parties regarding the licensing of certain technologies which it might
otherwise seek to commercialize itself.
9
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
As an intended means of raising additional financing to fund the growth of
CLINICEL sales and the product development programs, the Company filed, on July
30, 1998, a registration statement with the Securities and Exchange Commission
(SEC) covering a proposed reduction in the exercise prices of its Class A
Warrants (Nasdaq NM:CHAIW) and Class B Warrants (Nasdaq NM:CHAIZ), both of which
were scheduled to expire on September 21, 1998. Although this registration
statement was declared effective by the SEC, the Company did not proceed with
the offering due to unattractive market conditions for its securities. The
expiration of both the Class A Warrants and Class B Warrants has been extended
to March 21, 1999.
The Company has been notified by the NASDAQ Stock Market staff that, as of June
30, 1998, it no longer met the net tangible asset maintenance requirement for
continued listing on the NASDAQ National Market. Subsequent to a review by the
NASDAQ Listing Panel, the Company's Common Stock, Class A Warrants and Class B
Warrants were delisted from the NASDAQ National Market and currently trade on
the OTC Bulletin Board. The Company has filed an appeal with the NASDAQ Appeals
Panel, which is scheduled for review in December 1998.
The Company uses a number of computer programs accross its operations. The
Company has not completed its assessment of the year 2000 issue but believes
that costs of addressing this issue will not have a material adverse impact on
the Company's financial position.
The Company uses a number of third party vendors to support it's operations. The
Company has not completed its assessment of the year 2000 issue with these third
parties. If these parties are unable to address this issue in a timely manner,
and the Company is unable to instead conduct operations with other third party
vendors that have addressed this issue, it could result in a material financial
risk to the Company.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFE MEDICAL SCIENCES, INC.
(REGISTRANT)
/s/ ROBERT P, HICKEY
--------------------------
ROBERT P, HICKEY
PRESIDENT AND CEO
(Duly Authorized Officer)
Date: November 15, 1998 /S/ DREW KARAZIN
----------------------------
DREW KRAZIN
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(Duly Authorized Officer & Principal
Financial Officer)
11
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EXHIBIT INDEX
ITEM 6. 27 FINANCIAL DATA SCHEDULE
12
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JUN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 564 0
<SECURITIES> 0 0
<RECEIVABLES> 286 0
<ALLOWANCES> 0 0
<INVENTORY> 352 0
<CURRENT-ASSETS> 1549 0
<PP&E> 222 0
<DEPRECIATION> 821 0
<TOTAL-ASSETS> 1735 0
<CURRENT-LIABILITIES> 1727 0
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0 0
0 0
<COMMON> 8 0
<OTHER-SE> 433 0
<TOTAL-LIABILITY-AND-EQUITY> 1735 0
<SALES> 1116 601
<TOTAL-REVENUES> 1137 605
<CGS> 484 257
<TOTAL-COSTS> 3167 1387
<OTHER-EXPENSES> 4728 1552
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<INCOME-PRETAX> (6598) (2287)
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<INCOME-CONTINUING> (6598) (2287)
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<NET-INCOME> (6598) (2287)
<EPS-PRIMARY> .83 .29
<EPS-DILUTED> .83 .29
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